The Conductive Effect Research Of RMB Exchange Rate Fluctuation To Domestic Price And Interest Rate

Since1990’s, financial crisis and economic fluctuations throughout regional and worldwide areas have brought wide attention in the research fields. Back to the1992-1993European ERM crisis, the1994-1995Brazil financial crisis, the1997-1998Southeast Asia financial crisis, as well as the recent global financial crisis which originated in the US since2007, conductivity has been playing a significant role. Meanwhile, conduction through the pathway of exchange rate has been taking a more profound action, except for that though the traditional pathway of international trade. Within the framework of global economic integration and financial deregulation, a relevant study on exchange rate fluctuations will be conducive for effectively analyzing and deciding the impact of external shocks from exchange rates, and for making specific precautions to stabilize the national financial system and market system.For China, a unified and managed floating exchange rate regime based on market demand and supply was established on January1st,1994. Then, the RMB exchange rate formation mechanism was improved on July21st,2005, moving into a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. On June19th,2010and April16th,2011, respectively, RMB exchange rate formation mechanism was further moved and the elasticity of RMB exchange rate rose up. Historical data shows that since the reform of RMB exchange rate formation mechanism took place, such phenomenon as continued appreciation of RMB and ever-climbing inflations have drawn strong concerns from various social sectors.Focused on the above hot topics, this dissertation will, by analyzing the reform and transition of the RMB exchange rate regime and taking empirical researches, make a comprehensive investigation into the relationships between RMB exchange rate fluctuations and domestic prices, including import and export commodity prices, domestic consumer prices, domestic prices of money—interest rates, and so forth.First of all, monthly data since2000, including domestic import prices, consumer prices, RMB nominal effective exchange rates, international primary commodity prices, domestic output gap, and monetary supply, are sampled and modified. Based on that, the long-run equilibrium model of domestic import prices, consumer prices and related factors is built to analyze the real impact of exchange rate fluctuations, external price shocks, domestic demand variations, and currency shocks on the domestic import prices and consumer prices. The result shows that in the long run, the fluctuations of exchange rates and international primary commodity prices have a significant impact on the domestic import price indices, but they are not key drivers for the consumer price variations, neither are the fluctuations of domestic demands and monetary supply. During the sample periods, the increase in consumer prices comes more from the stickiness of CPI itself, which may result from the ever-climbing domestic inflation expectations. The result of segmented analysis shows that after the RMB exchange rate reform, the conductive efficiency of RMB effective exchange rate fluctuations to domestic import prices and consumer prices has been increased, and exchange rates will be playing a more and more important role in moderating macro economy.Following the Trade-pathway study which tests the impact of exchange rates on the domestic prices, Smooth Transition Regression Model is utilized to investigate the relationships between the effective exchange rate indices (including the exchange rates of RMB with respect to currencies of four regions: US, Euro areas, Japan and Korea) and comprehensive interest rate spreads. Empirical researches show that the impact of exchange rates on interest rates has obvious asymmetry, with relatively strong non-linear and transitional dynamic characteristics. When taking the regional perspective, in all four countries or regions above, interest rate spreads in the previous period are key drivers for those in the current period; and in the short run, exchange rates have a relatively large impact on interest rates. Therefore, in the short run, the process of expanding the RMB exchange rate elasticity should be active, gradual and steady, in case of the excessive fluctuations in exchange rates resulted from a sharp expansion of elasticity. Moreover, interest rate liberalization process should be speeded up gradually and sequentially, and the coordination with exchange rate marketization should be improved, in order to build up an efficient exchange rate-interest rate linkage mechanism.Based on the above investigations, empirical studies on the relationship between interest rates and prices are then provided. By selecting the SHIBOR interest rate, one that has a relatively high level of marketization and effectively represents the domestic monetary supply and demand, the model on relationships between domestic interest rates and prices is built, showing that domestic interest rates and prices appear non-linear variations along with the changes in domestic economic states. When economic development is relatively modest and inflation is moderate, increasing interest rates could effectively suppress demands. However, when economy is overheated and demand is flourishing, domestic high prices usually backward push up interest rates. In such case, the suppression effect on demands diminishes, while subject to the financing mode in domestic enterprises, high interest rates will be transmitted into costs through production channels, thus providing positive shocks to inflation.By investigating the relationships between one and another, exchange rates, interest rates and prices are considered to be tightly related and interactive in an open economy, so that analyzing and determining relationships among these economic indicators would be significant for realizing the general equilibrium in a open economy (i.e., the simultaneous equilibrium in commodity market, money market, and exchange rate market). Therefore, this dissertation starts from a micro perspective, and attempts to build a theoretical model including such related variables as exchange rates, interest rates and prices, to make an empirical analysis. The empirical results show that exchange rates, interest rates and prices are all key drivers for self variations, and the interacting pathways are not very smooth; what’s more, the degree of interaction between exchange rates and prices turns out to be higher than that between interest rates and prices, or that between exchange rates and interest rates. Thus, to manage inflation, interest rate policies would be less effective than the policies cooperation of exchange rates and monetary supply. In the following steps, given the premise of RMB exchange rate marketization, interest rate liberalization process should be speeded up gradually and sequentially, while the coordination with the marketization of exchange rates and prices should also be improved at the same time, in order to build up an efficient price linkage mechanism.